4.	ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

The following tables present the activity in the allowance for loan losses for the three month periods ending June 30, 2012 and 2011 by portfolio segment:

				Commercial
Three Months Ended June 30, 2012	Commercial			Real Estate			Consumer			Residential			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	1,138,063		$	2,486,708		$	513,260		$	206,001		$	90,071		$	4,434,103
Charge-offs		(24,277	)		(94,505	)		(16,693	)		(11,392	)		0			(146,867	)
Recoveries		18,439			13,523			2,099			0			0			34,061
Provision for loan losses		224,678			(153,745	)		(56,199	)		(903	)		(13,831	)		0
Ending balance	$	1,356,903		$	2,251,981		$	442,467		$	193,706		$	76,240		$	4,321,297

				Commercial
Three Months Ended June 30, 2011	Commercial			Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,160,906		$	3,205,039		$	631,316		$	258,607		$	5,255,868
Charge-offs		(225,106	)		(586,086	)		(12,361	)		(32,663	)		(856,216	)
Recoveries		8,132			3,501			16,286			10,142			38,061
Provision for loan losses		543,430			93,356			(142,264	)		3,399			497,921
Ending balance	$	1,487,362		$	2,715,810		$	492,977		$	239,485		$	4,935,634

The following tables present the activity in the allowance for loan losses for the six month periods ending June 30, 2012 and 2011 by portfolio segment:

				Commercial
Six Months Ended June 30, 2012	Commercial			Real Estate			Consumer			Residential			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	1,309,632		$	3,386,433		$	410,001		$	193,388		$	0	$	5,299,454
Charge-offs		(213,069	)		(857,205	)		(31,481	)		(11,392	)		0		(1,113,147	)
Recoveries		26,548			13,523			19,884			0			0		59,955
Provision for loan losses		233,792			(290,770	)		44,063			11,710			76,240		75,035
Ending balance	$	1,356,903		$	2,251,981		$	442,467		$	193,706		$	76,240	$	4,321,297

				Commercial
Six Months Ended June 30, 2011	Commercial			Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,218,865		$	2,896,176		$	546,603		$	130,263		$	4,791,907
Charge-offs		(359,807	)		(674,324	)		(72,819	)		(32,663	)		(1,139,613	)
Recoveries		35,780			6,999			27,993			10,142			80,914
Provision for loan losses		592,524			486,959			(8,800	)		131,743			1,202,426
Ending balance	$	1,487,362		$	2,715,810		$	492,977		$	239,485		$	4,935,634

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of June 30, 2012 and December 31, 2011:

			Commercial
June 30, 2012	Commercial		Real Estate		Consumer		Residential		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	793,384	$	1,418,184	$	182,739	$	121,649	$	0	$	2,515,956
Collectively evaluated for impairment		563,519		833,797		259,728		72,057		0		1,729,101
Unallocated		0		0		0		0		76,240		76,240
Total ending allowance balance	$	1,356,903	$	2,251,981	$	442,467	$	193,706	$	76,240	$	4,321,297

Loans:
Individually evaluated for impairment	$	4,218,406	$	8,444,494	$	364,276	$	848,223	$	0	$	13,875,399
Collectively evaluated for impairment		38,494,387		50,322,450		14,538,937		15,725,088		0		119,080,862
Total ending loans balance	$	42,712,793	$	58,766,944	$	14,903,213	$	16,573,311	$	0	$	132,956,261

			Commercial
December 31, 2011	Commercial		Real Estate		Consumer		Residential		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	466,001	$	2,312,396	$	109,309	$	103,393	$	2,991,099
Collectively evaluated for impairment		843,631		1,074,037		300,692		89,995		2,308,355
Total ending allowance balance	$	1,309,632	$	3,386,433	$	410,001	$	193,388	$	5,299,454

Loans:
Individually evaluated for impairment	$	3,930,572	$	11,063,154	$	274,700	$	595,598	$	15,864,024
Collectively evaluated for impairment		46,310,136		55,826,461		16,025,489		16,429,725		134,591,811
Total ending loans balance	$	50,240,708	$	66,889,615	$	16,300,189	$	17,025,323	$	150,455,835

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2012 and December 31, 2011. For purposes of this disclosure, the Company reports unpaid principal balance net of partial charge-offs.

							Three Months		Three Months		Three Months		Six Months		Six Months		Six Months
			Unpaid				Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Recorded		Principal		Related		Recorded		Income		Interest		Recorded		Income		Interest
June 30, 2012	Investment		Balance		Allowance		Investment		Recognized		Recognized		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	2,233,517	$	2,231,960	$	0	$	2,395,169	$	13,599	$	13,599	$	2,556,893	$	27,313	$	27,198
Commercial Real Estate:
General		3,563,035		3,563,478		0		2,438,933		10,489		10,486		2,333,487		12,921		12,912
Construction		0		0		0		214,764		0		0		303,937		0		0
Consumer:
Lines of credit		41,733		41,670		0		41,773		301		301		50,178		790		602
Other		20,333		20,333		0		20,374		0		0		20,415		0		0
Credit card		0		0		0		0		0		0		0		0		0
Residential		377,427		377,905		0		313,229		497		497		249,108		995		995
Subtotal	$	6,236,045	$	6,235,346	$	0	$	5,424,242	$	24,886	$	24,883	$	5,514,018	$	42,019	$	41,707

With an allowance recorded:
Commercial	$	1,984,889	$	1,984,404	$	793,384	$	1,826,765	$	9,250	$	8,610	$	1,800,707	$	18,773	$	16,716
Commercial Real Estate:
General		2,826,858		2,822,823		298,752		3,282,185		36,109		36,109		3,712,164		78,747		47,763
Construction		2,054,601		2,054,601		1,119,432		2,045,270		0		0		2,002,868		0		0
Consumer:
Lines of credit		190,911		190,703		95,879		222,020		1,317		1,204		200,654		2,854		2,848
Other		111,299		111,035		86,860		109,821		518		483		110,092		1,001		966
Credit card		0		0		0		0		0		0		352		0		0
Residential		470,796		469,468		121,649		539,980		3,846		3,646		529,993		7,477		7,196
Subtotal	$	7,639,354	$	7,633,034	$	2,515,956	$	8,026,041	$	51,040	$	50,052	$	8,356,830	$	108,852	$	75,489
Total	$	13,875,399	$	13,868,380	$	2,515,956	$	13,450,283	$	75,926	$	74,935	$	13,870,848	$	150,871	$	117,196

							Twelve Months		Twelve Months		Twelve Months
			Unpaid				Average		Interest		Cash Basis
	Recorded		Principal		Related		Recorded		Income		Interest
December 31, 2011	Investment		Balance		Allowance		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	2,591,467	$	2,589,356	$	0	$	3,511,753	$	55,237	$	55,237
Commercial Real Estate:
General		4,388,271		4,377,406		0		3,265,902		123,083		107,620
Construction		227,842		227,842		0		511,659		0		0
Consumer:
Lines of credit		91,397		91,327		0		72,432		616		616
Other		0		0		0		6,012		0		0
Credit card		0		0		0		0		0		0
Residential		186,207		186,723		0		314,265		0		0
Subtotal	$	7,485,184	$	7,472,654	$	0	$	7,682,023	$	178,936	$	163,473
With an allowance recorded:
Commercial	$	1,339,105	$	1,337,955	$	466,001	$	959,371	$	30,124	$	29,623
Commercial Real Estate:
General		4,171,379		4,135,809		1,024,846		2,865,844		51,694		30,049
Construction		2,275,662		2,275,337		1,287,550		2,069,800		2,373		2,202
Consumer:
Lines of credit		63,854		63,675		16,128		145,132		11,143		3,682
Other		119,449		119,275		93,181		74,854		1,955		1,650
Credit card		0		0		0		1,006		0		0
Residential		409,391		408,244		103,393		699,853		22,948		18,135
Subtotal	$	8,378,840	$	8,340,295	$	2,991,099	$	6,815,860	$	120,237	$	85,341
Total	$	15,864,024	$	15,812,949	$	2,991,099	$	14,497,883	$	299,173	$	248,814

Non-performing loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. However, non-accrual loans and loans past due 90 days still on accrual are all individually classified impaired loans.

The following tables present the aging of the recorded investment in past due and non accrual loans by class of loans as of June 30, 2012:

					Greater Than 90		Total Accruing				Total Recorded
	30-59 Days Past		60-89 Days Past		Days Past		Past Due		Current		Investment of
Accruing Loans	Due		Due		Due		Loans		Accruing Loans		Accruing Loans
Commercial	$	16,426	$	17,383	$	0	$	33,809	$	41,212,376	$	41,246,185
Commercial Real Estate:
General		0		0		0		0		50,874,468		50,874,468
Construction		0		0		0		0		3,954,219		3,954,219
Consumer:
Lines of credit		0		0		0		0		12,112,758		12,112,758
Other		5,350		0		0		5,350		2,102,350		2,107,700
Credit card		2,538		0		0		2,538		520,686		523,224
Residential		0		7,261		0		7,261		16,255,919		16,263,180
Total	$	24,314	$	24,644	$	0	$	48,958	$	127,032,776	$	127,081,734

					Greater Than 90		Total		Current		Total Non Accrual
	30-59 Days Past		60-89 Days Past		Days Past		Non Accrual		Non Accrual		Recorded
Non Accrual Loans	Due		Due		Due		Past Due Loans		Loans		Investment
Commercial	$	25,647	$	12,596	$	1,305,314	$	1,343,557	$	123,051	$	1,466,608
Commercial Real Estate:
General		158,995		0		89,975		248,970		1,686,478		1,935,448
Construction		0		0		94,135		94,135		1,908,674		2,002,809
Consumer:
Lines of credit		974		19,976		33,038		53,988		105,543		159,531
Other		0		0		0		0		0		0
Credit card		0		0		0		0		0		0
Residential		0		0		195,649		195,649		114,482		310,131
Total	$	185,616	$	32,572	$	1,718,111	$	1,936,299	$	3,938,228	$	5,874,527

The following tables present the aging of the recorded investment in past due and non accrual loans by class of loans as of December 31, 2011:

					Greater Than 90		Total Accruing				Total Recorded
	30-59 Days Past		60-89 Days Past		Days Past		Past Due		Current		Investment of
Accruing Loans	Due		Due		Due		Loans		Accruing Loans		Accruing Loans
Commercial	$	576,736	$	48,273	$	0	$	625,009	$	48,278,897	$	48,903,906
Commercial Real Estate:
General		197,488		243,075		0		440,563		57,422,942		57,863,505
Construction		0		0		0		0		4,063,776		4,063,776
Consumer:
Lines of credit		11,052		102,760		21,002		134,814		13,194,317		13,329,131
Other		8,817		0		0		8,817		2,306,281		2,315,098
Credit card		0		0		5,899		5,899		521,959		527,858
Residential		80,952		0		0		80,952		16,772,293		16,853,245
Total	$	875,045	$	394,108	$	26,901	$	1,296,054	$	142,560,465	$	143,856,519

					Greater Than 90		Total		Current		Total Non Accrual
	30-59 Days Past		60-89 Days Past		Days Past		Non Accrual		Non Accrual		Recorded
Non Accrual Loans	Due		Due		Due		Past Due Loans		Loans		Investment
Commercial	$	0	$	2,478	$	1,172,890	$	1,175,368	$	161,434	$	1,336,802
Commercial Real Estate:
General		0		0		869,398		869,398		1,673,895		2,543,293
Construction		0		0		406,090		406,090		2,012,951		2,419,041
Consumer:
Lines of credit		4,826		66,587		48,230		119,643		0		119,643
Other		0		0		8,459		8,459		0		8,459
Credit card		0		0		0		0		0		0
Residential		0		0		0		0		172,078		172,078
Total	$	4,826	$	69,065	$	2,505,067	$	2,578,958	$	4,020,358	$	6,599,316

Troubled Debt Restructurings:

The Company has allocated $1,698,919 of specific reserves on $10,788,238 of loans to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2012 and $1,499,705 on $9,036,794 as of December 31, 2011. At June 30, 2012, the Company did not have any additional performing loans outstanding to those customers. As of December 31, 2011, there was $222,700 committed to one customer.

During the three and six month periods ending June 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a stated rate of interest lower than the current market rate for new debt with similar risk; interest only payments on an amortizing note; a reduced payment amount which does not fully cover the interest; or a permanent reduction of the recorded investment in the loan.

Modifications involving a stated interest rate of the loan below the current market rate were for periods ranging from 11 months to 5 years. Modifications involving a reduced payment amount were for periods ranging from 5 months to 4 years. Two modifications involved a permanent reduction of the recorded investment in the loan.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending June 30, 2012:

			Pre-Modification		Post-Modification
			Outstanding Recorded		Outstanding Recorded
Three Months Ended June 30, 2012	Number of Loans		Investment		Investment
Troubled Debt Restructurings:
Consumer:
Lines of credit		1	$	22,416	$	22,416
Total		1	$	22,416	$	22,416

In the three month period ended June 30, 2012, there were no charge-offs as part of a troubled debt restructuring arrangement however an additional $22,000 of specific reserves were established on this troubled debt restructuring.

The following table presents loans by class modified as troubled debt restructurings that occurred during the six month period ending June 30, 2012:

			Pre-Modification		Post-Modification
			Outstanding Recorded		Outstanding Recorded
Six Months Ended June 30, 2012	Number of Loans		Investment		Investment
Troubled Debt Restructurings:
Commercial		1	$	11,880	$	11,880
Commercial Real Estate:
General		5		3,446,269		2,808,146
Consumer:
Lines of credit		2		126,860		126,860
Residential		1		62,085		62,085
Total		9	$	3,647,094	$	3,008,971

In the six month period ended June 30, 2012, there were $638,000 of charge-offs as part of a troubled debt restructuring arrangement and an additional $50,000 of specific reserves were established on these troubled debt restructurings.

Generally, a modified loan is considered to be in payment default when the borrower is not performing according to the renegotiated terms and stops communicating and working with the Bank.

For the three and six month periods ending June 30, 2012, there were no troubled debt restructurings that experienced a payment default within twelve months following the modification.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed utilizing the Company’s internal underwriting policy.

Credit Quality Indicators:

The Bank utilizes a numeric grading system for commercial and commercial real estate loans to indicate the strength of the credit. At origination, grades are assigned to each commercial and commercial real estate loan by assessing information about the specific borrower’s situation including cash flow analysis and the estimated collateral values. The loan grade is reassessed at each renewal or amendment but any credit may receive a review based on lender identification of changes in the situation or behavior of the borrower. All commercial and commercial real estate loans exceeding $500,000 are formally reviewed at least annually. Once a loan is graded a 5M or greater number, and is over $100,000, the loan grade will be reanalyzed once per quarter to assess the borrowers compliance with the Bank’s documented action plan. In addition to these methods for assigning loan grades, changes may occur through the external loan review or regulatory exam process. The loan grades are as follows:

1.	Exceptional. Loans with an exceptional credit rating.

2.	Quality. Loans with excellent sources of repayment that conform, in all respects, to Bank policy and regulatory requirements. These are loans for which little repayment risk has been identified.

3.	Above Average. Loans with above average sources of repayment and minimal identified credit or collateral exceptions and minimal repayment risk.

4.	Average. Loans with average sources of repayment that materially conform to Bank policy and regulatory requirements. Repayment risk is considered average.

5.	Acceptable. Loans with acceptable sources of repayment and risk.

5M.	Monitor. Loans considered to be below average quality. The loans are often fundamentally sound but require more frequent management review because of an adverse financial event. Risk of non payment is elevated.

6.	Special Mention. Loans that have potential weaknesses and deserve close attention. If uncorrected, further deterioration is likely. Risk of non payment is above average.

7.	Substandard. Loans that are inadequately protected by the borrower’s capacity to pay or the collateral pledged. Risk of non payment is high.

8.	Doubtful. Loans in this grade have identified weaknesses that make full repayment highly questionable and improbable.

When a loan is downgraded to a nine, it is considered a loss and is charged-off.

As of June 30, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

						Commercial Real Estate				Commercial Real Estate
		Commercial				General				Construction
		June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
		2012		2011		2012		2011		2012		2011
1		$	0	$	0	$	0	$	0	$	0	$	0
2			153,103		253,956		0		0		0		0
3			4,318,440		4,947,905		3,130,994		3,141,880		0		0
4			13,807,739		13,552,704		15,001,501		19,274,469		482,543		271,335
5			15,267,636		21,119,918		21,574,774		21,250,749		2,021,190		2,347,947
5	M		4,039,515		3,910,143		6,898,930		5,452,332		1,398,694		1,360,030
6			357,724		1,838,505		3,825,853		7,562,147		0		0
7			3,677,023		3,567,564		1,878,648		2,293,571		0		39,330
8			1,091,613		1,050,013		499,216		1,431,650		2,054,601		2,464,175
Total		$	42,712,793	$	50,240,708	$	52,809,916	$	60,406,798	$	5,957,028	$	6,482,817

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented and by payment activity. The following tables present the recorded investment in residential and consumer loans based on payment activity as of June 30, 2012 and December 31, 2011:

	Residential
	June 30,		December 31,
	2012		2011
Performing	$	15,725,088	$	16,429,725
Impaired		848,223		595,598
Total	$	16,573,311	$	17,025,323

	Consumer – Lines of credit				Consumer – Other				Consumer – Credit card
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2012		2011		2012		2011		2012		2011
Performing	$	12,039,645	$	13,293,523	$	1,976,068	$	2,204,108	$	523,224	$	527,858
Impaired		232,644		155,251		131,632		119,449		0		0
Total	$	12,272,289	$	13,448,774	$	2,107,700	$	2,323,557	$	523,224	$	527,858